Finance ministers agree measures for pan-European hedge fund regulation

EU FINANCE ministers have settled long-standing divisions and unanimously agreed new measures to subject the hedge fund and private equity sectors to pan-European regulation for the first time.

The new regime, elements of which had been resisted by Ireland, will introduce new controls and transparency measures over hedge funds, whose practices have been blamed by critics for fanning instability in the financial system.

The agreement came as France and Britain set aside their differences to back a compromise proposal tabled late last week by Belgium, holder of the EU’s rotating presidency. Pointing to lingering dissatisfaction with the compromise, French economy minister Christine Lagarde said the talks might have produced “something better”.

But internal markets commissioner Michel Barnier applauded the deal, saying the new regulations will put in place robust rules to enforce transparency while giving substantial powers to new European regulators.

“May I remind you that we are talking of major actors on the financial markets (more than 50 per cent of transactions on the markets some days),” Mr Barnier said. “May I also remind you that these actors were not until now in any way under surveillance or specific regulation at European level.”

Under the new rules, likely to be adopted next month by MEPs, the new European Securities and Markets Authority in Paris will have the power approve fund managers. The authority will also have powers to control risk-taking, by taking into account leverage levels and risk management schemes. Such information will be shared with a new body chaired by European Central Bank chief Jean-Claude Trichet, which will monitor systemic risk in the financial system.

“Ireland initially had some concerns about the way the new rules were shaping up on the liability of the depositor and valuer,” said an Irish official.

“We are satisfied with the way the final package deals with this issue. We were also keen to see that venture capital be excluded from the scope of the directive.”

The compromise deal saw France, increasingly isolated in the talks, withdraw demands for non-EU fund managers to be compelled to register with the national regulator in each EU state.

Instead, the Paris authority will power to operate a “passport system” for non-EU fund managers, giving them access to investors throughout the EU. In return for the French concession, Britain agreed to delay the start of this new licensing scheme for non-EU funds until 2015.